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View Full Version : Financial Crisis Did NOT Cause Recession




krazy kaju
03-11-2009, 10:16 PM
I was watching the March 10 Helicopter Ben speech at the CFR and noticed how he essentially blames the economic crisis on the preceding financial panic. This could lead one to blame the recession on financial irrationality, not the real economy. However, when one looks at the data, real gross private domestic investment (http://research.stlouisfed.org/fred2/data/GPDICA.txt) fell preceding the official start of the recession, showing a trend of less investment and therefore greater capital consumption, as Austrian theory predicts. This same trend can be seen before every single recession.

Helicopter Ben commits a typical cum hoc fallacy. There is a correlation between financial panic and economic crisis, but the way he assumes it is. The real economy effects the financial markets, not the other way around. Thus, increased capital consumption signaled lower worker productivity, which caused a fall in real wages (http://research.stlouisfed.org/fred2/series/COMPRNFB) and employment in higher order industries like construction (http://research.stlouisfed.org/fred2/series/USCONS?cid=11), making a recession almost inevitable.